Hank Hayes

The Tennessee Consolidated Retirement System bills itself as “one of the best-funded pension plans in the nation,” but some local governments have been pulling their new hires out of the plan.

The city of Kingsport did. So did Johnson City and Tri-Cities Regional Airport.

The reason: These cash-strapped political entities have found their contributions into TCRS to be too costly.

“Fifty-four (governmental entities) were at or above 15 percent of payroll (with TCRS employer contributions). ... Speaking as a former county commissioner, that tells me they are under a bit of funding pressure,” said Tennessee Treasurer David Lillard Jr., who oversees TCRS.

For instance, TCRA’s TCRS contribution expense is almost 18 percent of payroll. The airport decided to go with a different defined contribution plan that would have a maximum 9 percent of payroll cost.

“These are all issues of concern to us because these are significant-size local governments, and they are entities participating in the system for many, many years — some going back to 1948,” he noted.

So Lillard hit the road last fall and did listening sessions with more than 200 local government officials about their future with the state’s pension plan.

Proposals from those meetings resulted in legislation passed this year to create three less costly investment options.

TCRS says the bill, scheduled to go into effect on July 1, would not apply to current local government hires, state employees, K-12 teachers or higher education workers. No local governments are required to make any changes. The provisions are only effective if adopted by local governments, according to TCRS.

If those governments do nothing, they and their employees can stay in the current TCRS defined benefit pension plan, with retirement benefits beginning at age 60.

The first new investment option under the legislation includes an increase in the retirement age from 60 to 65, plus a cap on maximum allowed benefits and a revised employee contribution structure.

Option two is described as a “hybrid plan,” which includes a state-offered 401(k) plan. Local governments may also seek a defined contribution plan from another source, but the maximum employer contribution to that component would be 7 percent, according to the bill.

The final option includes a 401(k), a fixed-contribution 401(a) plan and a supplemental 457 plan with maximum employer contributions of 15 percent of eligible compensation.

Lillard said he’s educating local governments about the bill and fielding inquiries.

“Acceptance will increase as time goes along,” he said.

TCRS had net assets of $33.7 billion and paid out $1.6 billion in benefits in the fiscal year ending June 30, 2011.

“Going forward, the (TCRS) fund is well-positioned to continue to produce solid risk-adjusted returns,” Lillard said in TCRS’ last annual report.

Nationally, the sluggish economy and management issues have created problems for state pension funds.

“The states now have a $1 trillion problem of their own. That’s the shortfall that state-run retirement systems are facing over the next 30 years,” said the Pew Center for the States.

“Their benefits were much more generous than those we have in TCRS,” he said. “Their annual accrual rate is much higher. And they generally have skipped funding their pensions at various times. New Jersey and Illinois are the poster children for that. Tennessee has 100 percent funded its pension every year since 1972.”

For more about the legislation go to www.capitol.tn.gov. The bill’s number is SB 3216.